This article is for the following people.
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Those who are interested in real estate investment but are afraid of taking out loans for tens of millions of yen
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Those who saw an advertisement for “real estate investment from 10,000 yen” and became curious about how it works
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Those who want to know how it differs from physical real estate investment or REITs
Here is the conclusion first. Real estate crowdfunding and fractionalized products are mechanisms that allow you to receive distributions of rental income or capital gains from real estate with a small amount of money. While you can start without taking out a loan, they have the weaknesses of not being principal-protected and being difficult to liquidate freely midway. It is a prerequisite to understand the mechanism and consider investing only with money that won’t affect your daily life even if it is lost.
There are two main types of small-amount real estate investment
Both are products based on a law called the “Real Estate Specified Joint Enterprise Act,” and operators are managed under permits from the national or prefectural governments. With the legal amendment in 2017, “real estate crowdfunding,” which solicits funds over the internet, has also expanded.
The left side of the figure above is the “Anonymous Partnership Type,” and the right side is the “Discretionary Partnership Type.” In the anonymous partnership type on the left, the investor only provides money, and the operator holds the property. Many products allow investment from around 10,000 yen per unit, and most crowdfunding falls into this category. In the discretionary partnership type on the right, the investor holds a share of the property, so it is sometimes used for inheritance tax measures, but it is said that many products have a larger amount per unit.
The flow of money and the “priority-subordination” mechanism
The basic flow of the anonymous partnership type is as follows.
In order from the top of the figure, investors provide capital, the operator manages the property, and rental income or capital gains are distributed. What is important here is the fourth point, “priority-subordination.” The operator themselves also provides money as a “subordinated investment,” and if the property value drops, the mechanism is such that the loss is covered by the operator’s investment portion first.
However, there are limits to this mechanism. I calculated how the protected range changes depending on the ratio of subordinated investment.
The horizontal axis is the property price decline rate, and the vertical axis is how the investor’s (priority investment) principal decreases. The line for 10% subordinated investment shows zero loss until a 10% decline, but a principal loss of about 11.1% if it drops by 20%. The line for 30% subordinated investment shows no reduction in principal until a 30% decline, and it only decreases by about 14.3% after a 40% drop. The larger the subordination ratio, the wider the protected range, but it is not principal-protected as can be seen from the fact that the lines eventually start to go down.
Differences from physical real estate investment and REITs
Even though they are all “investing in real estate,” their characteristics differ significantly depending on the method.
The left column of the table shows physical real estate, the middle shows crowdfunding (anonymous partnership type), and the right shows J-REITs (listed real estate investment trusts). What I want you to pay attention to is the “liquidation” row. J-REITs can be sold on the market at any time just like stocks, but their prices also fluctuate daily. While crowdfunding prices do not fluctuate daily, many products do not allow or have restrictions on early withdrawal during the investment period. While physical real estate allows you to own large properties with a loan, you bear the burden of management and the risks of vacancies and repairs yourself.
Risks to know before you start
The figure above shows the risks to check for in small-amount real estate investment. In addition to the first risk of principal loss, the second risk, “deterioration of the operator’s management,” is often overlooked. In the anonymous partnership type, the property belongs to the operator, so you should also check the operator’s financial situation.
You should also be aware of the fifth point, taxes. For distributions from anonymous partnerships, 20.42% is withheld at the time of payment. For individuals, this is generally treated as “miscellaneous income” and is subject to comprehensive taxation; depending on your tax rate combined with other income, you may need to pay additional taxes or receive a refund when filing your tax return. You cannot offset these gains or losses against those from stocks or NISA. Please check with your local tax office or a tax accountant for details.
Note that for Real Estate Specified Joint Enterprise contracts, there is a rule that allows for a cooling-off period within 8 days of receiving the contract document. It is important to read the contents of the document carefully when applying.
Who is it suitable for?
I believe it is one option for the following types of people:
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People who want to experience the mechanism of real estate investment with a small amount of money without taking out a loan
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People who have money they do not plan to use during the investment period
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People who already hold stocks or investment trusts through NISA or other means and want to diversify their investments a little
Conversely, it is not suitable for people who have not yet saved up an emergency fund or who want to withdraw their money immediately when needed. Also, please do not forget that the “expected yield” is just a projection and not a guaranteed figure.
Read also
[PR] A service that allows you to research real estate investment from small amounts to full-scale
We list services for those who want to start with small amounts, and services for those who want to compare them with physical real estate investment in the future. The major premise for both is ‘do not decide on the spot’.
Just Fit (Real Estate Fractionalized Product)
A real estate fractionalized product offered by Shimada Asset Partners Co., Ltd. You can invest from 10,000 yen per unit.
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Strength:You can invest in real estate with a small amount starting from 10,000 yen
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Strength:Adopts a priority-subordination system. A mechanism where the operator’s investment portion bears the burden first for price declines within a certain range
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Points to note:It is not principal-protected, and there is a possibility of principal loss if the price decline is large. Yields are strictly ‘estimated’
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Points to note:Because it is a lottery, you may not be able to invest even if you apply
▶ View funds currently accepting applications for Just Fit (PR)
Oh!Ya (Bulk request for real estate investment materials)
A comparison site operated by Ceres Inc., a listed company. You can request materials from real estate investment companies that meet your criteria all at once.
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Strength:You can compare multiple companies with a single entry
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Strength:All services are free, and the operator is a listed company
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Points to note:Use this on the premise that you will be contacted by multiple companies
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Points to note:Those with an annual income of 5 million yen or less are not eligible for interviews
▶ Request materials in bulk via Oh!Ya (PR)
*Investment involves risks, and the principal is not guaranteed. Please make final decisions on your own.
*The above links are affiliate (performance-based advertising) links. Conditions and fees may change, so please be sure to check the official website before applying.
Summary
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Real estate crowdfunding and fractionalized products are mechanisms that allow you to receive distributions from real estate earnings with a small amount of money. There are anonymous partnership types and voluntary partnership types.
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The priority/subordination structure is a mechanism where the operator bears the burden of a ‘certain range of price decline’ first, and it is not a principal guarantee. Please also note that it is difficult to cancel midway.
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Distributions are generally classified as miscellaneous income (20.42% withholding tax). Consider this using money you do not need for daily living and will not use during the investment period.
Author of this article: Left my job to pursue a side business. Real estate notary and mortgage advisor. I share ‘money trivia’ while raising children. Following me would be a great encouragement!
*This article is for informational purposes only and does not recommend the buying or selling of specific financial products. Please make your own investment decisions.
*This article contains promotions (advertisements).
